Returns On Capital Signal Tricky Times Ahead For Changzhou Shichuang EnergyLtd (SHSE:688429)

If we want to find a potential multi-bagger, often there are underlying trends that can provide clues. Amongst other things, we'll want to see two things; firstly, a growing return on capital employed (ROCE) and secondly, an expansion in the company's amount of capital employed. Basically this means that a company has profitable initiatives that it can continue to reinvest in, which is a trait of a compounding machine. However, after investigating Changzhou Shichuang EnergyLtd (SHSE:688429), we don't think it's current trends fit the mold of a multi-bagger.

Return On Capital Employed (ROCE): What Is It?

If you haven't worked with ROCE before, it measures the 'return' (pre-tax profit) a company generates from capital employed in its business. Analysts use this formula to calculate it for Changzhou Shichuang EnergyLtd:

Return on Capital Employed = Earnings Before Interest and Tax (EBIT) ÷ (Total Assets - Current Liabilities)

0.017 = CN¥41m ÷ (CN¥4.0b - CN¥1.6b) (Based on the trailing twelve months to March 2024).

Thus, Changzhou Shichuang EnergyLtd has an ROCE of 1.7%. In absolute terms, that's a low return and it also under-performs the Semiconductor industry average of 4.2%.

Check out our latest analysis for Changzhou Shichuang EnergyLtd

Historical performance is a great place to start when researching a stock so above you can see the gauge for Changzhou Shichuang EnergyLtd's ROCE against it's prior returns. If you're interested in investigating Changzhou Shichuang EnergyLtd's past further, check out this free graph covering Changzhou Shichuang EnergyLtd's past earnings, revenue and cash flow.

The Trend Of ROCE

In terms of Changzhou Shichuang EnergyLtd's historical ROCE movements, the trend isn't fantastic. To be more specific, ROCE has fallen from 34% over the last four years. Given the business is employing more capital while revenue has slipped, this is a bit concerning. If this were to continue, you might be looking at a company that is trying to reinvest for growth but is actually losing market share since sales haven't increased.

What We Can Learn From Changzhou Shichuang EnergyLtd's ROCE

In summary, we're somewhat concerned by Changzhou Shichuang EnergyLtd's diminishing returns on increasing amounts of capital. Long term shareholders who've owned the stock over the last year have experienced a 39% depreciation in their investment, so it appears the market might not like these trends either. That being the case, unless the underlying trends revert to a more positive trajectory, we'd consider looking elsewhere.

On a final note, we found 3 warning signs for Changzhou Shichuang EnergyLtd (2 are significant) you should be aware of.

If you want to search for solid companies with great earnings, check out this free list of companies with good balance sheets and impressive returns on equity.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.